Markets on the edge

Stock markets remain on the edge. We heard a few headlines from Putin earlier, with the Russian President saying that risk of a nuclear war is "rising", and that he will defend Russia "by all available means." This led to a drop in index futures, but the markets quickly rebounded off their lows, only for the sellers to step back in again as we neared European close. We also saw US oil prices hit fresh pre-Ukraine-invasion low sub $73. A large build in US oil product stocks has added to worries about weakness in demand.

Investors are starting to re-focus more on recessionary signals than the peak inflation narrative. They worry that weaker demand in 2023 might hurt company earnings, and the current market valuations might be too high. The fact that inflation remains around 10% in Europe and very high in other parts of the world means central banks will tighten their belts and hold their policy tight for a long enough period to hurt demand further. In the US, the stronger wages and employment data we saw last week may yet encourage the Fed to continue tightening interest rates so that it climbs above 5% before the cycle is paused. This is an additional risk facing equity markets, especially those that pay low or no dividends.

At the time of writing, the S&P had bounced off the lows after testing one of the most important short term support levels at 3914ish (grey shading). A bullish trend line also converges here. But it is now below 21-day exponential moving average. A few days earlier, the retest and break above the 200 MA failed. Long term bear trend also held.

So, you get the feeling that if 3914 breaks now, we might get another puke lower. Let’s see what happens here. The bulls need to defend their ground here if they want higher or at least a recovery back to 3984 short-term resistance. If they fail to do so, 3840 – the base of the breakout – could be the next downside target for the bears.